Risk and return go together, as any good investment manager will tell you. That’s the dilemma facing overseas private bankers serving China: Household wealth of $29 trillion presents an unmissable opportunity, but the hazards of tapping it may also be unusually high.
Banks including Julius Baer Group Ltd and Citigroup Inc have told relationship managers to delay or reconsider travel to China after a UBS AG employee was asked by authorities to remain in the country to answer questions about an unspecified matter. UBS itself removed travel restrictions on its private bankers.
The circumstances surrounding the Singapore-based UBS banker’s situation are unclear. Still, the cautious response of other global wealth managers highlights the tension of overseas-based staff operating in a country that maintains capital controls and where an expanding pool of ultra-rich clients is frequently anxious to move money offshore.
China’s wealth has risen 1,300 per cent this century, more than double the rate of any other nation, Credit Suisse Group AG has said. UBS estimates a new billionaire is minted in China every two days.
At the same time, China’s economic growth has been slowing, stocks have slid into a bear market, real estate prices are cooling and the yuan has weakened — all giving investors more of an incentive to shift wealth offshore. The prospect of capital outflows fuelling further weakness has, in turn, prompted authorities to tighten restrictions. Rules restrict individuals to taking out $50,000 out of China per year.
Private bankers are in a tricky spot. Often, they already manage offshore assets for China-based clients. In an industry where relationships are paramount, visiting such clients on their home turf may be deemed necessary.
Rule No. 1 among foreign wealth managers with licenses in Hong Kong and Singapore is that offshore private bankers can meet with clients onshore but not solicit business from them. They can probably pick up documentation, for instance, though signing a contract wouldn’t be allowed.
That’s a lesson Crown Resorts Ltd learnt the hard way two years ago when 18 of its staff in China were detained for encouraging clients to visit its casino in Australia.
The easy answer is to stay home. Beyond avoiding red-tape or legal jeopardy, there’s far less competition from the large Chinese banks that dominate the onshore private-banking industry. In China, these institutions can offer the kind of wealth management products that Western firms’ compliance departments wouldn’t approve.
Asia’s offshore hubs are far from a small market. Hong Kong’s offshore wealth has been rising 11 per cent annually and reached $1.1 trillion last year, according to Boston Consulting Group. Growth in Singapore has been running at 10 per cent. That compares with 3 per cent in Switzerland, which remains the world’s biggest offshore wealth market.
For all the swelling ranks of China’s super-rich, UBS is preparing to diversify by putting ultra high net worth Americans at the centre of its growth strategy, almost a decade after it was fined by the US for helping thousands of clients evade taxes.
All the same, China may remain too lucrative a prize to ignore. Private bankers that operate there will continue to walk a fine line. They should tread carefully.